No. 97-265 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 MARTIN O. GJERDE, PETITIONER v. UNITED STATES OF AMERICA ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION SETH P. WAXMAN Acting Solicitor General JOHN C. KEENEY Acting Assistant Attorney General JOEL M. GERSHOWITZ Attorney Department of Justice Washington, D.C. 20530-0001 (202) 514 - 2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether the evidence showed that the federal gov- ernment was the target of petitioner's fraudulent scheme, such that it was sufficient to sustain peti- tioner's conviction for conspiring to defraud the United States. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinion below . . . . 1 Jurisdiction . . . . 1 Statement . . . . 1 Argument . . . . 6 Conclusion . . . . 11 TABLE OF AUTHORITIES Cases: Tanner v. United States, 483 U. S. 107 (1987) . . . . 5, 6, 7, 8, 10 United States v. Brown, 742 F.2d 359(7th Cir. 1984) . . . . 9 United States v. Hope, 901 F.2d 1013(11th Cir. 1990), cert. denied, 498 U.S. 1041(1991) . . . . 9 United States v. Smith, 596 F.2d 662(5th Cir. 1979) . . . . 9 Statutes and regulations: 18 U.S.C. 371 . . . . 2, 5, 6, 7, 8 18 U.S.C. 641 . . . . 9 42 U.S.C. 5304-5321 . . . . 5, 9 42 U.S.C. 5306(d)(2) . . . . 8 24 C. F. R.: Sections 570.420-570.432 . . . . 5, 9 Section 570.430(a) . . . . 8 (III) ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1996 No. 97-265 MARTIN O. GJERDE, PETITIONER v. UNITED STATES OF AMERICA ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION OPINION BELOW The opinion of the court of appeals (Pet. App. A1- A22) is reported at 110 F.3d 595. JURISDICTION The judgment of the court of appeals was entered on April 7, 1997. A petition for rehearing was denied on May 12, 1997. Pet. App. A23. The petition for a writ of certiorari was filed on August 11, 1997 (a Monday). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATEMENT After a jury trial in the United States District Court for the District of Minnesota, petitioner was (1) ---------------------------------------- Page Break ---------------------------------------- 2 convicted of conspiracy to defraud the United States, in violation of 18 U.S.C. 371. He was sentenced to 33 months' imprisonment, to be followed by two years of supervised release, and was ordered to pay 5,000 in restitution. The court of appeals affirmed. Pet. App. A1-A22. 1. The evidence at trial showed that Congress appropriates money to the Department of Housing and Urban Development (HUD) for the Community Development Block Grant Program, which includes the Small Cities Grant Program. HUD provides the Small Cities Grant Program funds to the States, which in turn make the funds available to communi- ties to foster economic development. The Minnesota Department of Trade and Economic Development (MDTED) is the Minnesota agency in charge of dis- bursing the HUD funds in accordance with HUD rules and regulations. Pet. App. A3. Clark and Richard Field controlled Clarkfield Dry- ing, Inc. (CDI), a Minnesota corporation located in Clarkfield, Minnesota. On behalf of CDI, the Fields approached the City of Clarkfield about a 282,000 loan through the Small Cities Grant Program for the purchase of equipment for the operation of a whey drying plant. In their grant application, the Fields stated that they would need an additional 292,000 of private financing to be successful. MDTED informed the City that, before releasing the funds for a loan to CDI, it would need proof through a loan commitment letter that CDI had obtained the private financing. In addition, the funding agreement between CDI and the City of Clarkfield required CDI to prove that the money obtained privately had been spent on CDI ---------------------------------------- Page Break ---------------------------------------- 3 equipment and that the City would be in the first security position with respect to the equipment. Pet. App. A3. Thereafter, the Fields sought a 292,000 loan from the Bonanza Valley State Bank to provide private financing for CDI. Petitioner, the president of the bank, refused to lend the funds to CDI in part because Clarkfield was outside the bank's service area. The Fields then created a corporation named Minnewaska Capital Investment, Inc. (Minnewaska), a holding and leasing company for CDI located within the bank's service area. They approached petitioner for a 292,000 bank loan to Minnewaska. Petitioner ap- proved the loan without requiring the Fields to submit a loan application or evidence of Minnewaska's financial status. Pet. App. A4. After the bank issued the loan, Minnewaska imme- diately transferred the 292,000 to CDI. Within a minute of that transfer, CDI paid 173,000 back to Minnewaska, which then repaid that amount to the bank. The remainder of the loan proceeds was left in CDI's checking account, but petitioner put a hold on the Minnewaska and CDI checking accounts, prevent- ing the Fields from gaining access to the proceeds of the loan. Accordingly, the loan proceeds were never available for use by CDI. Pet. App. A4-A5. In September 1989, Kevin Stroup, an attorney for the City of Clarkfield, told petitioner that, in order to obtain the HUD funds, the Fields were required to secure 292,000 in private financing and to show that the proceeds of the private financing were used to buy CDI equipment. Petitioner informed Stroup that the bank had lent 292,000 to Minnewaska, he provided records documenting the loan, and he represented that approximately 170,000 of the bank loan had been ---------------------------------------- Page Break ---------------------------------------- 4 spent on equipment for CDI. Petitioner never in- formed Stroup that 173,000 of the loan proceeds had been repaid to the bank, or that he had placed holds on the CDI and Minnewaska checking accounts to en- sure that the remaining proceeds did not leave the bank. Later, petitioner falsely confirmed Stroup that CDI had spent all of the proceeds of the bank loan on equipment, and that the CDI account had a zero balance. Pet. App. A5-A6. Based in significant part on petitioner's assurances that the bank loan had been spent on equipment, MDTED authorized the release of funds from the Small Cities Grant Program to the City, which in turn lent 282,000 to CDI. Within three months of the execution of the loan, the Fields repaid the balance of the bank loan. CDI eventually defaulted on the Small Cities Grant Program loan, however. Pet. App. A6. A certified public accountant hired by the City to trace the program funds lent to CDI concluded that the bank loan did not satisfy CDI's obligation to obtain private financing in order to qualify for the HUD funds, and described the loan as "a bogus transaction with no actual capitalization to the corporation." Id. at A7. 2. Petitioner was convicted of conspiracy to de- fraud the United States, in violation of 18 U.S.C. 371. On appeal, petitioner contended, insofar as pertinent here, that the evidence was insufficient to support his conviction because the conspiracy was not one to de- fraud the United States or an agency of the United States. Rather, he argued, the City of Clarkfield was the victim of the fraud because the money fraudu- lently borrowed by the Field brothers belonged to the City. The court of appeals rejected that contention. Pet. App. A1l-A13. ---------------------------------------- Page Break ---------------------------------------- 5 The court of appeals observed that, under Tanner v. United States, 483 U.S. 107, 130 (1987), the govern- ment was required to prove that the United States or one of its agencies was the target of the conspiracy. It noted, however, that "[a] conspiracy targeted at the United States or one of its agencies may be achieved by using third parties to effect the conspiracy, be- cause section 371 does not limit the method by which the conspirators may plan to defraud the United States." Pet. App. A12. After reviewing the evidence at trial, the court held that "a reasonable jury could have concluded that the target of the conspiracy was HUD, as represented by MDTED, the state agency that administered the HUD Small City Grant Pro- gram funds." Ibid. The court explained that, al- though HUD granted the Small Cities Grant Pro- gram funds to the State of Minnesota, that grant was subject to substantial federal regulation. See ibid. (citing 42 U.S.C. 5304-5321 and 24 C.F.R. 570.420- 570.432)). Based on that extensive federal regulation, the court concluded that MDTED "was acting as an agent of HUD, and any conspiracy to defraud MDTED * * * was in effect a conspiracy against HUD itself." Pet. App. A13. The court added that "[petitioner] and the Fields used the city to perpe- trate their fraud against HUD, but this does not alter the conclusion that the object of their conspiracy was to defraud HUD in order to obtain the federal funds." Ibid. The court also. rejected petitioner's claim that there was no violation of Section 371 because the State rather than the federal government imposed the "matching-funds" requirement. Noting that Section 371 prohibits both conspiracy to commit offenses against the United States and conspiracy to defraud ---------------------------------------- Page Break ---------------------------------------- 6 the United States, the court held that, "[w]hile alle- gations of a conspiracy to commit an offense against the United States would require proof of an agree- ment to violate a federal statute or regulation, alle- gations under the other conspiracy clause, that is, a conspiracy to defraud the United States, do not engender the same requirement." Pet. App. A13. ARGUMENT Petitioner contends that the evidence was insuffi- cient to support his conviction for conspiracy to de- fraud the United States because the City of Clark- field, not the United States, was the target of the fraudulent scheme. Relying exclusively on Tanner v. United States, 483 U.S. 107 (1987), petitioner argues that a city receiving federal financial assistance through a state agency is not an agent of the United States for purposes of Section 371. That contention provides no basis for a challenge to the validity of petitioner's conviction, which is fully consistent with Tanner. Tanner involved loans guaranteed by the Rural Electrification Administration (REA) for the con- struction of a power plant for Seminole Electric Coop- erative, Inc. (Seminole). Seminole's procurement manager conspired with a friend to steer contracts to the friend's construction company in return for kick- backs. The procurement manager and the owner of the construction company were charged with con- spiring to defraud the United States in violation of Section 371. The government's theory was that, be- cause Seminole's construction project received fed- eral financial assistance and because the REA super- vised some of the construction, a conspiracy to de- fraud Seminole was equivalent to a conspiracy to ---------------------------------------- Page Break ---------------------------------------- 7 defraud the United States. See 483 U.S. at 130 ("The Government argues that, because Seminole received financial assistance and some supervision from the United States, a conspiracy to defraud Seminole is itself a conspiracy 'to defraud the United States.'"). The Court rejected that argument, and held that a conspiracy to defraud a private corporation receiving financial assistance from the federal government does not constitute a conspiracy to defraud the United States. Id. at 129-132. The Court added, however, that conspiracies to defraud the federal government may be accomplished through innocent intermediar- ies, id. at 129, and the Court remanded the case to determine whether the defendants conspired to cause Seminole to make misrepresentations to the REA, id. at 132. This case is markedly different from Tanner. In Tanner, the target of the defendants' fraudulent kick- back scheme was Seminole. The federal government had only an incidental role in the power plant project as guarantor of the construction loans. That role, the Court concluded, could not transform the scheme into a fraud against the United States, for otherwise any conspiracy to defraud an entity or person receiving federal assistance would fall within Section 371. See 483 U.S. at 132. In this case, by contrast, HUD was the primary target of petitioner's scheme, the object of which was to obtain federal Small City Grant Program funds fraudulently. It is of no consequence that the HUD Small City Grant Program was administered by MDTED, a state agency. Under the statute govern- ing the program, a State may elect to distribute the HUD funds, as Minnesota has done, but in the ab- sence of such an election by a State, HUD distributes ---------------------------------------- Page Break ---------------------------------------- 8 the program finds itself. See 42 U.S.C. 5306(d)(2); 24 C.F.R. 570.420(a). Accordingly, a state agency such as MDTED, charged with distributing HUD funds under the Small City Grant Program in an electing State, performs the same role that HUD performs directly in non-electing States. A scheme to obtain HUD funds fraudulently through MDTED in Minnesota is no less a fraud against HUD than is a scheme to obtain federal funds directly from HUD in a non-electing State. Nor is it dispositive that petitioner made his misrepresentations to the City of Clarkfield, rather than MDTED directly. The City conveyed and was expected to convey those misrepresentations to MDTED, which, in reliance on the misrepresenta- tions, authorized release of funds from the Small City Grant Program to the City for payment to CDI. Pet. App. A6. Although the misrepresentations were made directly to the City, the purpose and the effect of the misrepresentations were to induce fraudulently the release of federal funds from MDTED. Such fraudu- lent actions fall well within the scope of Section 371; in Tanner, the Court made clear that conspiracies to defraud the federal government may be punished under Section 371 even when they are accomplished through innocent intermediaries. 483 U.S. at 129. Petitioner emphasizes (Pet. 10-11) that HUD's dis- bursement of funds to MDTED through the Small City Grant Program took the form of a grant rather than a loan, and argues that HUD no longer had any stake in the funds after they were granted to MDTED. The fact that the federal payment initially had the form of a grant disbursed to MDTED did not deprive the funds of their federal character for pur- poses of Section 371. In cases construing the statute ---------------------------------------- Page Break ---------------------------------------- 9 prohibiting the theft of any "money[ ] or thing of value of the United States," 18 U.S.C. 641, courts have sug- gested that, when an "outright grant is paid over to the end recipient, utilized, commingled or otherwise loses its identity, the money in the grant ceases to be federal." United States v. Hope, 901 F.2d 1013, 1019 (11th Cir. 1990), cert. denied, 498 U.S. 1041 (1991). But courts have also held that "while identifiable funds appropriated for use in a federal program are in transit between their federal source and their in- tended recipient and are still subject to substantial federal controls, they remain federal funds." Hope, 901 F.2d at 1019; see also United States v. Smith, 596 F.2d 662,664 (5th Cir. 1979). The court of appeals therefore correctly concluded that the Small City Grant Program funds obtained fraudulently by petitioner retained their federal character. At the time of the fraud, the HUD funds were still in the possession of MDTED, a state agency charged with distributing them to their end recipients pursuant to a federal objective, and that federal grant was still subject to substantial federal regulation under 42 U.S.C. 5304-5321 and 24 C.F.R. 570.420-570.432. Cf. Hope, 901 F.2d at 1016, 1019 (funds advanced by county, as grantee of HUD, to nonprofit organization formed to administer economic development program, in anticipation of immediate federal reimbursement and for purposes governed by federal statutes and regulations, were federal funds); United States v. Brown, 742 F.2d 359 (7th Cir. 1984) (funds disbursed by county as grantee of HUD to an operator of programs for the disadvantaged were federal funds within reach of 18 U.S.C. 641, because of the accountability both of the subgrantee to the grantee and of the grantee to HUD for the proper ---------------------------------------- Page Break ---------------------------------------- 10 disbursement of block grant funds intended for feder- ally sanctioned purposes). Contrary to petitioner's contention (Pet. 12), neither the fact that he was ordered by the district court to pay restitution to Minnesota rather than to HUD, nor the fact that only the City of Clarkfield and not the United States filed a claim in connection with CDI's bankruptcy proceeding, proves that HUD no longer had a stake in the Small City Grant Program funds once they passed to the State. The federal gov- ernment's interest in recovery of the fraudulently obtained funds is fully served by restoration of the funds to the State for further distribution in accor- dance with the requirements of the federal program. In any event, the government need not show that HUD incurred a direct financial loss as a result of the conspiracy in order to establish that it was a target of the fraud. As the Court stated in Tanner, if a defendant's "actions constituted a conspiracy to impair the functioning of [a federal agency], no other form of injury to the Federal Government need be established for the conspiracy to fall under 371 ." 483 U.S. at 128. When federal grant program funds are, as a result of a conspiracy to defraud, disbursed by a state agency charged with administering the program to a party not entitled to receive them, the function of the program is necessarily impeded and the federal government is properly regarded as a target of the fraud.* ___________________(footnotes) * The indictment alleged that petitioner conspired with the Fields to "defraud the United States * * * of funds belonging to [HUD]." Pet. App. A42. In finding that petitioner engaged in a conspiracy fraudulently to obtain HUD funds, the jury necessarily concluded that he conspired to impair the lawful ---------------------------------------- Page Break ---------------------------------------- 11 Finally, it is not significant that MDTED rather than HUD imposed the "matching-funds" require- ment. MDTED imposed the requirement to ensure that any disbursement to CDI of HUD funds would achieve the objective of the Small City Grant Pro- gram of facilitating community development in small cities. Petitioner's fraudulent scheme to evade MDTED's "matching funds" requirement targeted HUD funds and sought to impede the Small City Grant Program no less than if the requirement had been imposed by HUD itself. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. SETH P. WAXMAN Acting Solicitor General JOHN C. KEENEY Acting Assistant Attorney General JOEL M. GERSHOWITZ Attorney OCTOBER 1997 ___________________(footnotes) functioning of HUD. The indictment was not required to make that objective explicit.